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UPDATE 1-China's Nov FX reserves unexpectedly rise as yuan posts rare gain

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BEIJING, Dec 7 (Reuters) - China's foreign exchange reserves unexpectedly rose in November for the first time in four months as the yuan posted a rare gain amid signs of a thaw in trade tensions between Washington and Beijing.


China's reserves, the world's largest, rose by $9 billion in November to $3.062 trillion, central bank data showed on Friday.


That marked the first increase since July and compared with a drop of $33.93 billion in October, which raised concerns that the central bank was having to intervene more frequently in markets to support the faltering yuan currency.


Economists polled by Reuters had expected reserves to drop
$16 billion to $3.037 trillion.


The gain in November was due to changes in global currency rates and asset prices, according to China's State Administration of Foreign Exchange (SAFE), adding it expected reserve levels to remain stable despite market fluctuations.


Capital Economics said in a note that the PBOC appeared to have seen less need to intervene last month to support the yuan. It estimated the central bank likely sold around $11 billion of foreign exchange last month, down slightly from October and pointing to a moderation in outflows.


The yuan has been under pressure this year from a host of factors, ranging from a strong dollar and the escalating Sino-U.S. trade dispute to cooling economic growth at home, which has prompted Chinese authorities to shift to easier fiscal and monetary policy.


It eked out a 0.2 percent rise versus the dollar in November, its first monthly gain since March, supported first by state-owned banks and later by news that U.S. President Donald Trump would meet his Chinese counterpart Xi Jinping to discuss trade at the end of that month.


The high-stakes talks culminated in an agreement between the U.S. and China to hold off on any additional tariffs for another 90 days while the two sides resumed negotiations to try to bridge their differences. The news produced a strong bounce in the yuan early this week, but gains have started to fizzle amid growing scepticism over whether Washington and Beijing can reach a substantive deal on deeply divisive issues in such a short period of time.


"We believe that the exchange rate is likely to be an important issue in future trade negotiations, so the government will continue to strictly manage the RMB exchange rate and avoid sharp depreciation," economists at UBS wrote in a report on Monday.


If the trade talks fail, new U.S. tariffs could be imposed on Chinese goods as early as March, renewing pressure on the yuan and possibly pushing it through the closely watched 7 to the dollar level, last seen during the global financial crisis. It is currently around 6.88.


While the risk of the yuan weakening past 7 appear to have receded in the short-term while the trade talks are under way, it is still expected to breach that level in the next six months, according to about 60 percent of FX strategists polled by Reuters, who also said authorities would continue to exert control over the currency in 2019. Most economists believe China's economy will continue to cool even if the trade dispute is settled, weighed down by sluggish domestic demand. That could see Beijing use up more reserves to slow the pace of the yuan's declines.


Renewed weakness in the yuan could also limit authorities' ability to use more aggressive policy easing measures -- such as policy rate cuts -- to jumpstart the economy. So far, they have opted for more modest loosening than in past downturns.


Recent Chinese data had suggested capital outflows are on the rise as the economy cools. But so far there have been no signs of a widespread flight of funds like in the last downturn in 2015, largely due to capital controls put in place since then.


China's central bank sold a net 91.6 billion yuan worth of foreign exchange in October - the third straight month of forex sales rather than purchases. The value of China's gold reserves rose to $72.122 billion from $71.968 billion at the end of October.


(Reporting by Stella Qiu and Ryan Woo; Editing by Kim Coghill)

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